6% Sales Tax–A Disaster for Maryland

In a fall 2007 Special Session, at the request of the O’Malley/Brown Administration, the sales tax was hiked 20% from 5% to 6% in a solely partisan vote. An analysis by Dee Hodges for the Maryland Taxpayers Association of the rate increase effects over the following six years, concluded that it has been a failure.

In fact, it resulted in a net revenue loss for the state and for retailers who lost sales. It damaged jobs, companies and small businesses. The 6% sales tax rate exceeded those of any of the surrounding states, all within easy driving distance for Marylanders. Bill Campbell, co-chairman of the Maryland Taxpayers Association and candidate for State Comptroller, notes “Consumers make rational economic choices. Shopping either out of state, or on line to avoid Maryland sales tax, is predictable. After all, in Delaware, 6% of zero is zero.” The “green eye shade” facts follow. The tax was not only pushed higher, it was also broadened to cover additional sales, namely the so-called computer sales tax. This tax kicked up such a fuss, it was replaced by the so-called Millionaires’ Tax in the next session. In 2007, the last year of sales taxes at 5%, state sales tax revenues reached $3.5 billion on sales of $68.9 billion. In the following six years, revenues went higher, but sales declined dramatically for a total of $22.9 billion in lost sales. As of 2013, the last year reported, sales were down from 2007 by $379.9 million even though state revenues had climbed to $4.1 billion. That, however, is not the end of the story. The state lost income taxes on these same lost sales. We estimate that the income tax revenue loss was between $1.26 billion and $1.9 billion putting the total loss to state revenues at more than $6.5 million.* The sales tax had been at 5% for some 31 years. In the previous two recessions, 1990 and 2001, sales and revenues from the sales tax continued to increase with only a minor slowdown for one year in the earlier recession. In 1991, that hiccup involved a 2% loss in state sales tax revenues or about $31 million. Despite this hiccup, state sales tax revenues grew by 27% for the six year period. They also grew by 30% over the same period after 2001. Even after the 2007 sales tax rate hike, those revenues grew, but by only 19% over six years until 2013. It is the contention of the Maryland Taxpayers Association that sales tax revenues and actual sales might have been higher had this tax never been raised. Taxes are the way we pay for government. Voters trust that their elected representatives will tax cautiously so as not to harm their opportunities to work and support their families, particularly in recessions. This recession has seen a particularly sluggish recovery. After economic downturns, governments at every level lard up on well-intended regulations and taxes in order to prevent future downturns, but this time, especially in Maryland, with unfortunate consequences. For the welfare and benefit of all Marylanders, good oversight and review over taxes, regulations, and budgets to which elected officials pay close attention is sorely needed. Footnote: *The estimate assumes that the total loss was at a 5-1/2% marginal personal rate or at the 8.25% corporate rate. Sources: (copy and paste) 2007 Special Session SB 2 http://mgaleg.maryland.gov/webmga/frmMain.aspx?tab=subject3&ys=2007s1/billfile/sb0002.htm SB 2 votes Senate: http://mgaleg.maryland.gov/webmga/frmMain.aspx?ys=2007s1/votes/senate/0139.htm House of Delegates: http://mgaleg.maryland.gov/webmga/frmMain.aspx?ys=2007s1/votes/house/0100.htm – Comprehensive Annual Financial Report Records covering revenues from 1988 to 2013: http://finances.marylandtaxes.com/Where_the_Money_Comes_From/